Californians can choose from a variety of gambling opportunities. California has legal gaming that includes a state lottery, parimutuel horse wagering, cardclubs, Indian casinos, and charitable gaming.

Much of the basic framework of gaming has been enacted by the people through constitutional amendments rather than by the Legislature. The State Lottery was enacted through a constitutional amendment as was horse racing. The Constitution specifically prohibits Nevada and New Jersey-type casino gaming.

Gambling is a $14 billion business in California as measured by the handle.1 The amount actually lost by consumers is much less, approximately $2.5 Billion. While that is a small portion of California's approximately $700 billion economy, it is a sizable amount of money. As the following chart shows, California is the sixth largest gambling state. California is the only one of these six states that doesn't have high-stakes casinos. These totals do not include Indian gaming as there are no reliable state by state estimates.

A cautionary note is needed for the preceding chart. Handle is defined as the total amount wagered. Since much of the gaming is between players, not the house, at California cardrooms, the handle is difficult to measure but must be estimated.

The following chart shows the popularity of different games for Californians. Not surprisingly, the lottery is the most popular.

There are some small regional differences in participation as the following chart shows:

No discussion of gambling in California would be complete without noting the gambling that Californians do in their neighboring state. Californians spend $9.5 billion in Nevada each year on gambling while making 14 million casino visits.2 California is the top feeder state to Nevada casinos.

Following is a discussion of the different types of gambling in California. The next chart shows the relative sizes of these gaming types. The discussion does not include the gambling that occurs on cruise ships. Owing to a recent change in federal law, cruise ships can call at consecutive California ports and allow gambling. This will be a relatively minor amount compared to the overall state total. The following graph includes estimates of charitable gaming other than bingo. While bingo is the only legal charitable gambling, the category includes charitable sweepstakes which aren't actually gambling under the California penal code. The difference is that donations are requested rather than require for the prizes.

Parimutuel Wagering

In California parimutuel wagering is limited to horse racing, which is regulated by the California Horse Racing Board. Horse racing was legalized in California in 1933 through a constitutional amendment. The amendment authorized the Legislature to regulate horse racing and to authorize parimutuel wagering at licensed racing tracks. Enabling statutes were soon enacted. The statutory authority for the board is commonly known as the Horse Racing Law.

The goal of the regulatory scheme is to:

Assure protection of the public,

Encourage agriculture and the breeding of horses in this state,

Generate public revenues,

Provide for maximum expansion of horse racing opportunities in the public interest, and

The Board consists of seven members appointed by the Governor to four-year terms. The appointments are subject to confirmation by the State Senate. The Board has two main programs related to gaming. One is overseeing parimutuel wagering and the other is designed to ensure the integrity of the actual horse race. The Board has about 75 employees, including investigators, to regulate about $2.5 billion in wagers placed at facilities instate. Another $1 billion is bet on California races from out of state facilities and is handled by the Board.

One recent change has been the legalization of simulcast wagering. This is parimutuel gaming at a site remote from the actual race, although most of the sites are at existing racetracks. Intrastate and interstate wagering can occur at these sites. The amount wagered at simulcast facilities now exceeds the amount wagered at races.

There are some disturbing trends for the industry however.

The on-track handle has dropped 47 percent in the last decade.

License fee revenue for the state has declined 27 percent in the last five years.

State Lottery

The California lottery gained approval at the November 1984 election, making California a relatively recent entrant into the lottery business. The vote was not even close as a 58-percent majority approved the lottery. Only one state has turned down a publicly-run lottery and the aye votes have been as high as 81 percent, although the mean of all states was 64 percent, slightly above California's vote. The initiative amended the California Constitution and added provisions to the California Government Code.

Prior to the initiative, five major legislative proposals on the lottery had surfaced but none of them had made it to the ballot. Circumstances changed when in 1982, the state faced a major budget shortfall. Momentum increased for passage until Governor Deukmejian said he would veto a lottery if it passed, bringing a halt to legislative efforts.4

With legislative action stymied, an initiative was started. At the time it was considered an expensive campaign to qualify and win passage, costing about $1 million. A pro-lottery coalition led by a company that supplied lottery products qualified the measure and earned passage. The statute earmarked the proceeds for education. An interesting requirement of the statute was the extensive disclosure by firms that would get contracts. One of the leading firms was an affiliate of Bally Manufacturing Company that already had to meet this extensive disclosure requirement because of their New Jersey gaming activities.5 The measure passed despite opposition by the Governor, Attorney General, and some religious leaders who were mostly Protestants. The affiliation of the religious leaders is notable because religious figures have been important opponents of gambling, although they are usually from Protestant denominations.

The 1984 Lottery Measure Was the Second Chance Voters Had to Approve a Lottery. California voters turned down an initiative in 1964. That measure would have authorized a private firm to run a lottery. The measure lost by a large margin, 31 to 69 percent. The initiative was opposed by the Governor, Superintendent of Public Instruction, and most of the state's press.

The 1984 initiative set up an autonomous five-member commission to run the lottery. The commissioners are appointed by the Governor and confirmed by the Senate. One of the commissioners must have a minimum of five years experience in law enforcement and at least one of the commissioners shall be a certified public accountant. Prior to the keno game being dropped, the lottery had about 800 employees and 30 agents to oversee $2 billion in gross sales.

The Lottery Act limits the types of games that can be used. The specific list is drawn so as to limit competition with horse racing, cardclubs, and bingo.

The lottery in California is a government monopoly. Government was chosen to operate the lottery primarily to reduce the possibilities of corruption.

In California, about half of the revenues are returned to winning players as prizes. A minimum of 34 percent is allocated to educational institutions and the remainder covers administrative expenses including retailer commissions. California has one of the nation's largest lotteries, befitting the size of the state.

The lottery does not provide a large amount proportionately to the school districts. The average district gets about 2 percent of its general fund from the lottery. The amount varies from year to year, depending on the success of the lottery. Since 1985-86, the amount has varied from $76.64 to $178.63 per student. According to informal surveys compiled by the California State Lottery, the majority of the money goes for salaries and wages. (It is not clear from the survey if the respondents meant higher salaries for existing teachers or more teachers.)

Lottery Activities Diminished by Legal Problems. The state lost its case in Western Telcon. The case banned the Lottery's electronic keno and definitively states that banked games are not legal within the state. Shortly after, the Attorney General advised that the Scratcher vending machine is a type of slot machine, although it is a lottery game. Slot machines are illegal in California. The Scratcher vending machines accounted for approximately $200 million in lottery revenues annually. The keno game is significantly larger, amounting to about $400 million annually.

Cardclubs

Cardclubs have existed in the state as long as there has been a state. State law neither specifically authorized nor prohibits these. California's gambling statutes prohibit certain types of gaming, rather than authorizing certain types of gaming. Cardclubs are legal because they have not been specifically prohibited. But only those games not prohibited can be played at these facilities. House revenues are generated by charging a seat rental fee, by time period or by hand played.

As shown in the following chart, California cardclubs are the largest nation-wide when compared to other states with free-standing cardclubs.

Cardclubs are approved by and licensed by local jurisdictions. Owners and operators must be registered with the Attorney General per the Gaming Registration Act.6 This chapter applies to all gaming clubs in existence on or after July 1, 1984. Under the current law, the state does not tax the clubs, but local governments may negotiate a tax with the developers.

Cardclubs in California generate a great deal of gambling activity compare to clubs in other states. It may seem surprising that California allows cardclubs. There are several reasons why cardclubs are viewed differently than other types of prohibited gaming. One reason is that the club cannot directly benefit from the amount wagered. Fees can be charged only for play. In that way, money is lost to other players, not to the house, and is more likely to remain in the community. Casinos are viewed more negatively because they, like lotteries, take money from the community. Another reason is that playing cards requires an element of skill and is often viewed differently than games of chance. Cardclubs are very different than casinos. Cardclubs cannot offer the banked games such as 21 and slot machines that are normally found in casinos. The cardclub provides services such as a cashier and dealer. Players, for a fee, can play against each other, not the house.

Cardclubs Have a Large and Growing Presence Within the State. It is estimated that the state's 233 cardclubs generated $711 million in gross revenues in 1995.7 Bettors wagered approximately $8.5 billion.8 Bettors wagered four times more than Californian's spent buying lottery tickets. As the following table shows, cardclubs have added almost 500 tables since 1992. Although the number of tables has increased, the number of California's cardclubs has actually shrunk as older smaller parlors have closed.

Overall, the industry has been dramatically changing. As noted earlier, the older smaller clubs are closing and new larger facilities are being opened. Despite the shift, cardclubs vary tremendously. For example, one of the owners has been quoted as saying that Sacramento has seamy, derelict-type cardclubs.9 Other jurisdictions have much more extensive and elaborate facilities. The newly opened Club San Pablo drew 5,000 people to its opening. The 71,000 square foot club cost $31 million, has 60 tables and 900 parking spaces. The club is supposed to pump $4.6 million in sales tax and $14-18 million in salaries into the local community.

California's Largest Card Clubs

Card club

Cities

# of tables

City Revenues from Card Clubs

% of Gross Revenue City Receives

Commerce Club

Commerce

217

$13.5 million

13.0%

Bicycle Club

Bell Gardens

200

$8.94 million

12.5%

Hollywood Park

Inglewood

140

$5.52 million

11.0%

Crystal Park Casino*

Compton

110

$0.32 million

10.9%

Ladbroke's Casino

San Pablo

100

$3.73 million

12.4%

Normandie Club

Gardena

80

$4.16 million

15.5%

Huntington Park Casino*

Huntington Park

70

$0.23 million

8.0%

Garden City Card Club

San Jose

40

$3.01 million

13.0%

Bay 101

San Jose

40

$5.51 million

13.0%

Oaks Card Club

Emeryville

40

$1.4 million

6.5%

*Note: the figures for Crystal Park Casino are for only November, 1996. The club opened in October,1996.

*Note: The figures for the Huntington Park Casino are from the 94-95 fiscal year. The casino and the city

agreed to defer the payments to the city until July 1997 due to changes in management.

Sources: Department of Justice

The changes that have occurred are projected to continue. Following is a chart from a noted gaming industry publication that shows the proposed increase in card tables at California cardrooms.

Much of the increased player interest is due to fast-paced Asian games such as Pai Gow. These can generate large pots, up to $75,000 and involve side betters. Sacramento Sheriff Glenn Craig says these situations bring "money laundering, Asian gang involvement and the actual or attempted corruption of local government."10 However, because of their revenue potential, cardclubs are touted as a possible source of funds for local governments.

Despite the construction of these new clubs, the industry profitability has been hurt. In a case over what is called jackpot poker, the clubs lost. The game was ruled a lottery, which is illegal expect when offered by the state. The jackpot was paid when two players got certain hands, hands that were not useful in winning the poker game that was the main object of play. The jackpot was incidental to the poker game. The jackpots were as high as $70,000, from which the clubs got a healthy cut.

California Has no Special State Agency to Regulate Cardclubs in the State. Although the Department of Justice has a role, it is not the regulator in the same sense that other states have regulatory agencies that oversee gambling activity. This situation has led some outside researchers to point to California as an anomaly. As one researcher, who overstated the number of cardclub rooms, noted:

"For a bad example of gambling regulation, California stands out. There are over 400 legal cardrooms in that state, with no special agency to regulate them."11

California's Gaming Registration Act was enacted to provide a minimum level of regulation by registering owners and operators as a prerequisite to licensing. The Gaming Registration Act is administered at the state level through the California Attorney General. Annual registration is required. This annual process involves updating of information which trigger additional background checks.

The act provides that state and local governments have concurrent jurisdiction over gaming establishments within the state and expressly disclaims state preemption of regulation. On an ongoing basis, cardclub rooms are regulated only by municipalities which develop a code for regulation. Sometimes a combined city-county ordinance is used such as in Sacramento. New cardclub rooms can only be opened after an affirmative vote of the electors within the city, county, or city and county, unless the jurisdiction had a club operating prior to January 1, 1984.

Other limitations on clubs include the types of games. Most non-banked card games are permitted, but faro, monte, roulette, lansequenet, rouge et noir, rondo, tan, fan tan, seven-and-a-half, twenty-one, hokey-pokey or any banking or percentage game played with cards, dice or devices for money or scrip are explicitly prohibited.12 In non-banked games, players are not playing against the house who controls the purse such as in twenty-one at a Nevada casino. California law currently prevents publicly owned-companies from operating cardclub rooms with the exception of those companies who run racetracks. Sizes, locations and hours of operation are determined on the local level. Gambling activities that are not expressly prohibited or regulated by state law may be prohibited or regulated by local government.

Cardclub Elections and Actions are Often Quite Volatile. In Folsom, the council allowed expansion of an existing cardclub, but opponents collected signatures to force a referendum of the Council's action. Some residents in Colma were gravely concerned about cardclub gambling and unsuccessfully attempted to overturn by referendum the 1993 vote to legalize cardclub gaming. In San Mateo, Bay Meadows poured more than $400,000 into the cardclub election but still lost by a 3-2 ratio. The Bay Meadows proposal included a provision that the City of San Mateo would get 15 cents of every dollar gambled. That would mean that the city would get as much as $6 million annually. In addition the club would pay all of the costs associated with regulating itself that was approximately $1 million per year. A San Jose club put in $150,000 to attack the proposal in an attempt to squelch competition.

There were other instances of money from the existing clubs being used to finance the opposition in cardclub ballot measures. This occurred in the recent election in Pomona. The Agua Caliente Band of Cahuilla Indians sponsored advertisements opposing several new cardclubs proposed for the city. The cardclub in Bell Gardens, the one that is partly owned by the Federal government, also contributed $200,000 to quash clubs in elections in Pomona and Pico Rivera.13 Actions such as these have led to a Fair Political Practices Commission (FPPC) suit against the Commerce Club for the club's contributions against a ballot measure in nearby Pico Rivera. The FPPC alleges that the Commerce Club did not report independent contributions and was late filing other statements of contributions. The developer of the proposed Pico Rivera club has initiated a suit against the Bicycle Club for similar reasons.

A recent council action in San Jose authorized doubling the number of card tables at existing clubs. It was opposed by social workers and groups within San Jose's large Vietnamese-American community who claim that gambling-related problems are tearing apart vulnerable immigrant families and leading to more crime. The action was eventually reversed.

Revenue Needs by Local Government Have Led to New Cardclubs. There was a rush of new cardclubs after the passage of Proposition 13 because of local government's desire to replace the lost property tax revenues. Small blue-collar cities were particular favorites.14

Concerns Expressed About the Fiscal Dependence of Cities on Cardclubs. Local governments have the obligation to regulate, but critics question whether there isn't a conflict of interest. When a single revenue source becomes that important, the city is not just a revenue recipient but a municipal partner according to some reports.15 The partnership reached a point with one club where the city considered issuing bonds to finance the purchase of the federal interest in the club by club employees.16 The concern is that the city is reluctant to interfere with the club operation for fear of losing municipal funds.

The following table shows the large proportion that cardclub revenues comprise of city budgets in some cities.

The fear to regulate can be heightened by the competition between cardclubs. Many cardclubs are very close to each other and so they do compete even if they are within different jurisdictions. This competition has raised questions about how effective can the local government be if stricter regulation may drive customers to other clubs in other jurisdictions, jeopardizing the regulating town's revenues.

Ban on New Clubs Led to Numerous Elections. There is a statewide moratorium on new cardclubs. The ban began January 1, 1996 and lasts until January 1, 1999. The moratorium was part of SB 100 (Maddy).

The cardclub elections held in 1995 took on added importance because they were considered a barometer on a possible statewide ballot campaign to legalize casino-style gambling. Following is a table of recent elections.

Cardclubs Elections and City Council Votes During 1995

City

Proposal

Election Date

Results

South San Francisco

150-table cardclub casino on an isolated patch of Oyster Point land just east of Highway 101

Sept. 12

Failed 56%

Y - 4461

N - 5644

Irwindale

60,000 square foot cardclub that would serve @ 3000 customers daily

Oct. 21

Failed 59%

Y - 192

N - 280

San Mateo

50-table cardclub at Bay Meadows Race Track. Also proposed that the city of San Mateo receive 15 cents of every dollar gambled at the club -- the highest cardclub tax rate in the state.

Nov. 7

Failed 62%

San Jose

City council votes on allowing up to 100 additional tables at existing clubs, which now have 81 tables.

Nov. 7

Approved initially then repealed.

Marina

City council votes on whether to amend its gambling ordinance to allow additional clubs. Developers have proposed a 60-table club and resort on an old Fort Ord airfield.

Nov. 7

Approved

Coachella

Election

Nov. 7

Approved

Hesperia

Election

Nov. 7

Failed

Ontario

Election

Nov. 7

Failed

Palm Springs

Three cardclubs; one 30 table cardclub in a former department store.

Nov. 7

Approved

Pomona

One 100 table cardclub; previous measure to allow two cardclubs was defeated in April.

Nov. 7

Failed 55%

Y - 5262

N - 6452

Pleasanton

City council votes on a proposal for a cardclub at the Alameda county Fairgrounds.

Nov. 7

Failed

Suisun

Riverboat Cardclub.

Nov. 7

Approved

Y-1851

N-1829

Hawaiian Gardens

Measure A.

Nov. 21

Approved

Y- 965

N- 722

Lynwood

Measure L to legalize cardclub casinos.

Dec. 19

Failed

Y- 609

N- 990

Pacifica

Measure B, an advisory vote that called for a single, 200-table gambling hall to be built on Mori Point.

Dec. 12

Failed 76%

Pacifica

Measure A which would change Pacifica's anti gambling ordinance to allow cardclub rooms in the city.

Dec. 12

Failed 80%

Azusa

Proposition A which would have allowed the Normandie Casino to build a gambling facility.

Dec. 12

Failed

Y- 1339

N- 3511

Colton

Election

Dec. 12

Failed

Perris

Election

Dec. 12

Failed

Full Casino Gambling the Subject of Initiatives. Three statewide initiatives were being considered for circulation. One of the most prominent parties involved with an initiative is Mr. Mark Bragg, a real estate developer and president of the Palm Springs Gaming Corporation. He was one of the sponsors of the recent cardclubs measure in Palm Springs. His proposal would have designated three sites across the state that would be allowed to have Nevada-style casino gaming. An adequate amount of signatures were gathered to be submitted to the Secretary of State. It did not, however, qualify for the ballot, because too many signatures could not be verified. The sponsor disagrees and has vowed to contest the state's findings. The measure needed 694,000 but only received 588,809 confirmed signatures.

There have been some problems associated with the signature gathering for the initiative. Paid gatherers have admitted to violations of the law both in California and Nebraska. In California, a paid gatherer admitted to forging signatures. At least in Nebraska, the violations were not limited to initiatives associated with gambling.

Another initiative to allow casino gambling at five designated racetracks was being circulated in early 1997. If successful at gathering the required amount of signatures, it will be placed on the June 1998 ballot.

Charitable Gaming

Cities and counties are allowed under state law to authorize bingo. The regulator is left up to the local governments. The gross revenues are $60 million. The total is about 2 percent of overall gaming gross revenues within the state.